Nov. 13 (Bloomberg) -- A New Jersey town settled a housing-bias lawsuit that was set for a U.S. Supreme Court hearing next
month, scuttling a case that might have shielded lenders from
discrimination suits pressed by the Obama administration.

The Mount Holly town council today unanimously approved an
accord with residents who sued over the redevelopment of a
predominantly minority neighborhood. The agreement makes Supreme
Court dismissal of the case a formality.

The settlement averts the prospect of a watershed change in
the scope of the 1968 Fair Housing Act and a separate law the
administration has used against lenders. The court was
considering requiring proof of intentional discrimination and
barring “disparate impact” claims, which focus on the effect
of a disputed policy without requiring evidence of intent.

President Barack Obama’s administration is relying on
disparate-impact arguments in suits over housing and auto loans.
Bank of America Corp., Wells Fargo & Co. and SunTrust Banks Inc.
have agreed to pay at least $480 million to settle claims since
December 2011. The U.S. Consumer Financial Protection Bureau has
embraced the disparate-impact approach under the Equal Credit
Opportunity Act.

The settlement is a missed opportunity for lenders, said
Camden Fine, president of the Independent Community Bankers of
America, which represents smaller lenders. He said legal
uncertainty over disparate impact is “creating havoc among
lenders.”

‘Solid Lenders’

“The government is using these issues as clubs to force
otherwise solid lenders to do the government’s bidding on
whatever social outcome they want,” Fine said in an e-mail.
“This has got to stop or the very people they are purportedly
trying to help will find it more and more difficult to get
credit.”

Civil-rights advocates said they feared the court would
invalidate the disparate-impact approach, changing the law
across the country.

The Supreme Court under Chief Justice John Roberts has cut
back legal protections for racial minorities in other contexts.
In June, a divided court struck down a core part of the 1965
Voting Rights Act, which opened the polls to millions of
Southern blacks.

Given those rulings, “I wouldn’t be too eager to have this
bench decide a disparate-impact housing claim,” said Elizabeth
Wydra, a lawyer with the Washington-based Constitutional
Accountability Center, which filed a brief backing disparate-impact claims.

Appeals Courts

Eleven courts of appeals have ruled on the issue, and all
have said the Fair Housing Act allows disparate-impact claims.

The high court will have another opportunity to take up the
issue. The insurance industry in June sued to challenge a
Department of Housing and Urban Development rule that interprets
the Fair Housing Act as allowing such claims.

The settlement marks the second time the high court has
agreed to rule on the issue, only to see a case disappear. A
dispute involving St. Paul, Minnesota, was scuttled in 2012 when
the city dropped its appeal at the Obama administration’s
urging.

The housing case stems from an effort by Mount Holly to
redevelop what it said was a blighted, high-crime area. Known as
the Gardens, the neighborhood was originally built to provide
homes for returning World War II veterans and their growing
families. In more recent years, the Gardens was the only
predominantly black and Hispanic area in town, with 75 percent
minority residents in 329 residential units.

Vacant Lots

The town began buying homes in the Gardens, in most cases
paying $30,000 to $50,000, until only 70 remained in private
hands. The redevelopment effort has since stalled, even as the
town has destroyed scores of homes and accumulated $18 million
in debt. No new houses have been built, and the remaining
structures now form a patchwork amid vacant lots.

A group of current and former residents sued, claiming the
effort had a disparate impact on minorities. A federal appeals
court said the case could go forward.

Under the settlement announced tonight, the township can
proceed with development of the area in exchange for the
construction of 44 “emerging market” homes in the
neighborhood. Twenty of them will be offered to current
residents at no extra expense.

“The clients wanted to be able to stay in the community
once it was revitalized,” Olga Pomar, the lead lawyer for the
plaintiffs, said during a conference call today. “The township
has agreed that no one will have to move until a new unit is
available for them.”